The impact showed in the third quarter both in gross margin, which fell by 2 percent, and inventory levels, which increased by 32 percent.

Analysts pay close attention to retailers inventory levels, viewing them as a potential barometer for demand. High inventory can sometimes be the result of waning demand.

In Nike’s case, it’s the costs — not slowing demand — that are triggering inventory growth.

Chief Financial Officer Don Blair said the growth of Nike’s inventory levels slowed by the unit, but the cost of each unit continues to rise. Of the 32 percent increase, 20 percent is the result of higher costs.

Most of the inventory growth is in the company’s fastest-growing markets — including North America and China — where it’s necessary to fill at-once demand. But executives seemed troubled by the higher inventories elsewhere, particularly with sportswear apparel in Europe and China.

“We’re working with our wholesale partners to manage existing inventory and we’ve been adjusting our buys to rebalance supply and demand for these businesses,” Blair said. “Going forward, we’ll continue to work diligently to manage inventory risk and maintain a healthy retail marketplace.”

On the gross margin side, Nike Brand President Charlie Denson said increased prices are starting to show signs of offsetting the higher production and shipping costs. And that’s likely to continue improving into the fourth quarter after a full-quarter of higher prices.

Those higher prices, by the way, seem to be having little effect on demand, which is a testament to the strength of Nike’s brand.

FlyKnit as savior

Higher prices, though, alone can’t improve gross margins, which are expected to fall another 1 percent in the fourth quarter.

CEO Mark Parker said developing new manufacturing methods plays a role in offsetting margin pressure.

Nike last month debuted Flyknit, a footwear technology featuring a one piece knit upper that reduces waste thanks largely to to not needing multiple material types.

Parker said Flyknit will be the next technology platform — like Lunar cushioning, Flywire support and others before it — to be spread across sports categories.

As Nike scales Flyknit, Parker said it can expect to see “significantly better margins.”

“There’s quite a bit of other major initiatives along the same line we’re investing in that we think will have some signficant impact on margin opportunities,” he said.

North American strength

North America is already Nike’s largest market, but it’s also the source some of its strongest growth, surprising even the company’s executives.

Sales in the third quarter grew 17 percent to $2.1 billion in North America. Futures orders – product ordered for delivery between March and July — was up 22 percent. Direct-to-consumer sales — a higher-margin category since there’s no third-party retailer taking a cut — grew 19 percent in North America.

“If I hadn’t been working here for the last 33 years, I’d swear North America was an emerging market,” Denson said.

Challenge in Western Europe

The same, though, can’t be said for Nike’s second-largest market.

Sales in Western Europe increased just 6 percent in the quarter, the lowest of any market other than Japan, which is still recovering from last year’s earthquake.

“We are nowhere near our full potential in Europe,” Denson said.

The European economy can share some of the blame there, but Denson said Nike has plenty of growth opportunity.

The plan, he said, is to leverage the brand’s strength in running and soccer performance products, while pushing apparel and women’s products for additional growth.

“We believe Europe is still a growth market,” he said.

The NFL effect

Nike is less than two weeks away from the big April 3rd unveiling of its National Football League gear, but demand already appears robust.

Nike showed off some footwear, gloves and socks during the Pro Bowl last month and Denson said the response led to orders that “so far have exceeded our expectations.”

That would seem to be reflected in Nike’s futures orders, which grew 15 percent from last year to $9.4 billion.

Denson wouldn't say whether the NFL product had influence on the futures numbers. Blair, however, said “there is obviously an impact.”